PI Insurance – Past, Present & Future
Planned Cover National Business Manager Cos Cirocco reflects on the evolution of PI Insurance in the building industry, the impacts of the NSW D&BP Act on the insurance market, and future changes and complexities in the industry.
What does your role at Planned Cover involve? What’s a typical day like?
My core role is advising clients on their insurance needs, specialising in their Professional Liability exposures. I am born and bred in Adelaide, so I have been looking after our SA client base for almost three decades. Approximately 15 years ago I was also given the task of looking after our Tasmanian clients, a client base I have thoroughly enjoyed engaging with and continue to enjoy to this day.
I also hold the role of National Business Manager, which involves me in many national duties including servicing some of our larger accounts around the country and liaising with many of our business partners, including the ACA.
A typical day involves working with my assistant to ensure our clients’ renewal needs and new enquiries are appropriately addressed, including personally meeting with clients whenever possible. Lately team meetings and increased compliance duties also take up significant portions of the day.
How long have you been involved in the insurance industry and what are the major changes you have seen over this time? How does today’s economic environment compare with when you started out?
I started out in the insurance world back in 1984 with AMP, but it wasn’t until 1992 that I started working in the Professional Liability Insurance field, and much more so with construction professionals, like architects, from 1997 when I was employed by Planned Cover (known at the time as RAIA Insurance Brokers). Back then, Professional Indemnity Insurance was not that well understood and a significant portion of the architectural profession in Australia was either underinsured or uninsured, but over the course of the 1990s and early 2000s the value and need for this type of insurance became much more understood and many jurisdictions began to mandate the need for this type of insurance. More telling, however, was that more and more of the architect’s clients began to not only demand that consultants carry PI insurance, but also began to stipulate high levels of indemnity as well, with amounts like $10 million and $20 million becoming much more commonplace for larger projects.
When I first started in 1992, the economic environment was very difficult and the building industry, and architects in particular, were finding the going pretty tough, coming off the deep recession of 1991. Many architects were unemployed or seriously underemployed at the time and although things were bleak, it did provide the impetus for many practitioners to start their own practices, many of which grew into very successful Australian architectural practices.
What is the current state of the professional indemnity (PI) market in Australia and what are the main issues you anticipate arising in the future?
In the main, PI rates are on the rise and the rate of increase can range significantly depending on the risk profile of the professional seeking cover.
There has been a continuing tendency over the past two or three years amongst PI insurers to restrict policy coverage, mainly through the imposition of additional exclusions or tighter policy wordings. In addition to the tendency to tighten coverage, insurers have also been looking for significant increases in both premium and self-insured retentions (ie excesses or deductibles).
Insureds with paid claims and/or open notifications and exposure to ‘Combustible Cladding’ continue to experience the greatest impact in the current market.
Professional Indemnity Insurance represents the second most exposed class of insurance for Lloyds of London and is now an exposure that Lloyds are actively seeking to lessen. This has contributed significantly to the previously mentioned reduction of PI capacity in the Australian market.
In addition to the diminished supply, insurers are also experiencing a higher frequency and severity of PI claims than ever before. This is leading to insurers and re-insurers reviewing risks more stringently, which is leading to much slower response times than in previous years.
There is continuing claim activity around construction professionals exposed to cladding/non-compliant building products, including architects.
Historically, PI claims tend to increase following economic turmoil and although the Australian economy seems to have been largely unaffected from COVID-19, much of the insurance market is very much driven by global factors,
The reduction of PI capacity in the Australian market has meant the need for brokers to build multi-indemnity layer programs, meaning that insurers may need to refer your risk to re-insurers based overseas for review, and this all takes additional time and adds to the complexity of the program.
What are the main impacts you anticipate when the NSW Design and Building Practitioners Bill comes into effect?
Different issues to consider under the Act and Regulations:
- Extended Duty of Care
- Design Compliance Declaration (draft)
- Registration – adequate insurance
Professional indemnity policies (usually) cover “Civil Liability”, the Extended Duty of Care provision coming into effect under the above Bill.
There are many aspects of the Bill that present challenges to the insurance industry and the responses to date have varied, from some insurers moving to apply exclusions for any additional exposure the Act and Regulations might impose on an Insured, whilst other underwriters seem to remain relatively comfortable with the additional exposure.
One of the more concerning aspects of the extended duty of care imposed under the Bill, is that the extended duty is being applied retrospectively to loss, which first became apparent in the last 10 years. Hence, unless your PI Insurer is applying an exclusion that excludes cover under this Bill, the chances are that your current PI ‘Civil Liability’ policy wording will actually provide cover for the extended duty of care both going forward and retrospectively. This has insurers concerned, and there is concern that some will move to exclude the exposure in future renewals or seek to increase premiums to accommodate the increased liability, which is particularly concerning in the already ‘hard’ PI insurance market.
The truth is that the real effect on the insurance industry may not become apparent for some time and there is also a belief, or perhaps hope, that the increased responsibilities imposed on building professionals will improve building practices and help stem the recent spike in PI claims over recent years.
What steps can architects take to ensure their ability to access adequate PI insurance? How can architects best develop positive relationships with their insurer?
Some strategies to keep in mind to help with your insurance renewal include:
- Return your proposal form early. This will allow your broker time to review and send to insurers for discussion. Insurers may need to refer your risk to senior underwriters or possibly re-insurers based overseas for review, and this all takes additional time. A longer lead time for the broker also improves your chances of securing the best possible terms as opposed to rushing the process, leaving little or no time to negotiate better terms.
- Be prepared to put in more thought and time in completing your submission and, depending on the size of your business, we suggest putting some work into developing a risk management program that we can include with your completed proposal form as part of your PI renewal submission – this is particularly important if you have exposure to projects involving high-rise residential apartments.
- For any Insureds that have had the misfortune of being involved in a claim or several claims, a risk management program with specific emphasis on what you have learned from the claim/claims, can also prove highly beneficial in assisting us to secure favourable terms on your behalf.
- Professional Indemnity Insurance can be a complex type of cover to understand and place, so without sounding too self-serving, it is extremely important in times like this that you ensure the broker placing your PI insurance is one that fully understands PI Insurance. Underwriters/Insurers have no obligation to explain to you why they are imposing certain conditions on your cover, which is why you need to be dealing with a broker that does understand the terms and conditions being imposed and how they may impact on your business.
Cos Cirocco is an Economics graduate and a Qualified Practicing Insurance Broker (QPIB). He is also a Member of the Australian Insurance Law Association and has over 30 years of insurance experience. He is currently the National Business Manager of Planned Cover and Manager of the company’s SA/TAS client base and has been specialising in the provision of Professional Indemnity/Liability Insurance and Risk/Claims Management advice to Construction professionals for over 25 years.